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Portfolio123 » List all forums » Forum: General Comments » Thread: BLOG: Building A Passive-Aggressive ETF Strategy |
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mgerstein
Advanced Member
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EXCERPT Many casual observers believe the essence of ETF investing is passivity, that these securities are to be used by those who want to avoid trying to "beat the market." This is not true, since even the most seemingly passive strategies are really more active than casual observers realize. This blog will explore the passive-aggressive nature of the basic ETF world, and demonstrate some ETF-oriented approaches to screening and backtesting. FULL ARTICLE. BY: Marc Gerstein CATEGORY: P123 Step-By-Step |
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gfagerlin
Advanced Member
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Marc: You discuss slippage and make some suggestions. One thing I have noticed is that ETFs often have a significant difference between the close and next open prices. Can you comment on why this is? Is it recalculation of net asset value? Re-balancing the fund? Recalculating leverage? Glenn |
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mgerstein
Advanced Member
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The difference between tracking error at the open vs. the close may have something to do with the in-kind exchange mechanism. Left to their own devices, any exchange traded fund will vary from the underlying value of the assets, sometimes considerably so and for prolonged periods. This is natural since the shares are based on supply and demand for the fund itself, whole NAV is the aggregate of the share prices. So ETF stock price will always have a natural inclination to go their won way based on supply and demand for the ETF itself. But as that happens, we see the corrective mechanism, the in-kind exchanges, kick in to pull ETF prices back toward NAV. As each trading day progresses, the ETF price is pulled back toward its anchor by actual in-kind exchanges and/or share price movement in response to arbitrageurs who anticipate in-kind exchanges. With ETFs that invest in the least exotic and most liquid assets, the intra-day tracking error will be modest. But as the ETFs get more exotic, and as in-kind exchanges get harder to implement, tracking error can grow in all parts of the trading day. |
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